When a person files bankruptcy, they are required to show the court how much money they have left over each month after paying their living expenses. This is referred to as their bankruptcy disposable income.
If there is enough money left over after paying living expenses, the bankruptcy court will expect the person to propose a plan to repay their creditors some of what they owe.
Often there is not enough money left over each month to fund a repayment plan and the bankruptcy is filed as a Chapter 7 bankruptcy.
If there is enough money to fund a repayment plan, the bankruptcy is often filed as a Chapter 13 bankruptcy.[Note: there are other critical factors to consider before filing a case as Chapter 7 or Chapter 13. But, this post focuses on the means test.]
A bankruptcy filer’s “disposable income” must be presented in two different ways in a bankruptcy petition.
(1) The bankruptcy filer must prepare a list of their current income and expenses. The current income and expenses schedule is just what it sounds like: a list of your current, real-life monthly income and expenses.
(2) The bankruptcy filer must also prepare a hybrid, historical calculation called the bankruptcy means test.
The bankruptcy means test is also an analysis of your income and expenses. But, your means test “income” is deemed to be an average of your monthly income for the six months leading up to your bankruptcy filing date.
If you have recently changed jobs, been laid off, or received a big bonus, your average monthly income might look very different from what your typical monthly income will be going forward.
When it comes to expenses, the means test keeps it weird.
Instead of allowing you to deduct your actual, real-life expenses, it limits you to standard IRS deductions for many categories of expenses.
These IRS standards are adjusted from time to time. They readjusted on April 1, 2022. Here is the list of new IRS standards used on the bankruptcy means test.
For some expenses on the means test, you are allowed to deduct your actual, real-life expenses. But, you need to know when this is allowed. That can mean consulting the case law in your jurisdiction.
No, the means test does not apply to everyone.
You can skip the means test analysis if you are (1) a disabled veteran whose debts were incurred during active duty or (2) your debts are primarily non-consumer debts.
Assuming you are required to “take” the means test, you will use the steps described below.
Again: if you think you are ineligible to file Chapter 7 because of the means test, be sure to consult an attorney. You may not be taking your full situation into account when doing the calculation, and / or you may be able to overcome a presumption of abuse.
Give us a call for a free bankruptcy consultation. We’ll be happy to run a preliminary means test calculation for you.